TAILIEUCHUNG - FEES PAID TO AUDIT FIRMS, ACCRUAL CHOICES, AND CORPORATE GOVERNANCE

NOP currently is led by an AMS Deputy Administrator and is organized into three branches. Audit Report 01601-03-Hy 5 11 The Standards Development and Review Branch is responsible for NOP’s rulemaking functions; the Accreditation, Auditing, and Training Branch manages the accreditation of certifying agents; and the Compliance and Enforcement Branch ensures continued compliance with the regulations. Two other AMS program areas assist NOP. AMS’ Compliance and Analysis Program (AMS Compliance) manages all NOP-related appeals and also conducts investigations of alleged willful violations of the Finally, AMS’ Audit, Review, and Compliance (ARC) conducts audits of potential and current certifying agents | Journal of Accounting Research Vol. 42 No. 3 June 2004 Printed in . Fees Paid to Audit Firms Accrual Choices and Corporate Governance DAVID F. LARCKER AND SCOTT A. RICHARDSON Received 22 April 2003 accepted 28 January 2004 ABSTRACT We examine the relation between the fees paid to auditors for audit and non-audit services and the choice of accrual measures for a large sample of firms. Using our pooled sample we find that the ratio of non-audit fees to total fees has a positive relation with the absolute value of accruals similar to Frankel Johnson and Nelson 2002 . However using latent class mixture models to identify clusters of firms with a homogenous regression structure reveals that this positive association only occurs for about of the sample. In contrast to the fee ratio results we find consistent evidence of a negative relation between the level of fees both audit and non-audit paid to auditors and accruals . higher fees are associated with smaller accruals . The latent class analysis also indicates that this negative relation is strongest for client firms with weak governance. Overall our results are most consistent with auditor behavior being constrained by the reputation effects associated with allowing clients to engage in unusual accrual choices. 1. Introduction The purpose of this paper is to examine the relation between the fees paid to audit firms for audit and non-audit services and the behavior of University of Pennsylvania. We appreciate the comments of Stanley Baiman Jan Barton Sudipta Basu George Benston Jeff Coulton Richard Leftwich Linda Myers Grace Pownall Stephen Taylor seminar participants at Emory University and especially an anonymous reviewer. The financial support of The Wharton School and Ernst Young LLP is gratefully acknowledged. 625 Copyright University of Chicago on behalf of the Institute of Professional Accounting 2004 626 D. F. LARCKERAND S. A. RICHARDSON accounting accruals. This relation if it exists is an important

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